Question

Due Date: February 21, 2020 11:59:00 PM EST CH4 DISCUSSION BOARD/COLLABORATION (Due February 24, 11:59 pm) Attached Files Rubric Template Discussion Board 20 points.xlsx (11.052 KB) The instructor will use a Rubric to grade this assignment. Go to COLLABORATION/CH4 Discussion Board to complete this assignment You have recently been employed by a large clothing retailer. One of your tasks is to help prepare financial statements for external distribution. The company's lender, National Savings & Loan, requires that financial statements be prepared according to generaly accepted accounting principles (GAAP). During the months of November and December 2021, the company spent $1 million on a major TV advertising campaign. The $1 million included the costs of producing the commercials as well as the broadcast time purchased to run them Because the advertising will be aired in 2021 only, you charge all the costs to advertising expense in 2021, in accordance with requirements of GAAP The company's chief financial officer (CFO), who hired you, asks you for a favor. Instead of charging the costs to advertising expense, he asks you to set up an asset called prepaid advertising and to wait until 2022 to record advertising expense. The CFO explains. This ad campaign has produced significant sales in 2021, but I think it will continue to bring in customers throughout 2022. By recording the ad costs as an asset, we can match the cost of the advertising with the additional sales in 2022. Besides, we expense the advertising in 2021. we will show an operating loss in our income statement. The bank requires that we continue to show profits in order to maintain our loan in good standing Failure to remain in good standing could mean we'd have to lay off some of our recent hires REQUIREMENT 1: As a staff accountant, should you knowingly record advertising costs incorrectly I asked to do so by your superior? REQUIREMENT 2: Does your answer change if you believe that misreporting will save employee jobs? KEEP IN MIND THE FOLLOWING: • Post your INITIAL RESPONSE to the prompt early in the assignment period so that others have time to respond to you. • RESPOND constructively to at least 2 other students

Answer 1

Requirement 1:

The request made by the CFO here is certainly unethical since deferring expenses to next period will result in correct profits being shown as per the books. As per GAAP matching principle, incomes have to be matched with the expenses in the year that they are incurred i.e. in this case the advertising is incurred for 2021 and must be booked in the same year. Although the superior may pressurize you to do it in order to meet his targets and sustain the bank loan, the same must not be obliged. Instead the CFO must be made aware of the potential consequences of altering the accounts and presenting misleading figures. The same will be highlighted during external audit after the conclusion of the financial year and if the firm's account department does not have a valid explanation for deferring expenditure, the transaction will be red flagged. This will ultimately lead to a qualification in the audit report which is a serious concern for the investors and stakeholders at large and can shake off investor confidence. This will hurt the long term growth prospects of the company as well as income tax troubles when the company does IRS filings. Also, the CFO and the employee directly involved with manipulating figures will at risk of loosing their jobs and jeopardizing their career. Hence, the decision to postpone expenses to show income in the current year will do no good for the company as well as on a individual level.

Requirement 2:

A company that makes losses will most certainly want to cut down expenditure in order to make the business survive or more profitable. The major expenditure for any company is salaries and wages of personnel. The company may want to reduce the employee count to save the company from making losses. However, this will effect the livelihood of those who are asked to leave due to the company's poor financial health. This is a case of ethical dilemma but the same must not be undertaken. The reason being although you may temporarily save the jobs of the employees by showing a profit the same cannot be continued in the long run if the business does not cope up. If it continues to make losses in the future as well there can be no alternative. Also as already highlighted during external audit the same will be questioned and the reason for deferring expenses cannot be humanitarian grounds. Hence, it is better to not defer expenses although it may cost some employees their jobs since it will hurt them more employees in the long run.